india going global.indd - The IIPM Think Tank

MERGERS & ACQUISITIONS
The Current Scenario:
Between 2005 and 2006, on a year-on-year basis, global
M&A volume had gone up by 37%. People who deal with
corporate strategies and M&A dealmakers, think that since
the global interest rates are still at relatively low levels and
hedge funds have taken an active role in the recent past
in M&A activities, there is a possibility that global fund
managers shall continue to allocate more fund for M&A
deals at least in near future.
The objective of this article is to focus on the issues of
M&A that require attention of professional managers having
specialization in finance, law, strategies etc., since these
are crucial by nature. It is the fact of life today that the
banks fund M&A mainly for financial reasons realizing
the need for faster growth in volume of business through
inorganic route. Companies make strategic growth plan
through internal operations and acquisition. When mature
resources are needed right away, acquisitions perhaps make
business sense.
Initial Issues:
Internally it should be addressed that when normally M&A
drives fail to generate greater value then why at all a company
should think for it By and large the reason of failure
is poor post-merger integration as a result of which proper
plan for such integration and accountability aspects are to
be drawn up in detail at the strategic plan making stage.
Before placing the matter to the Board, the CEO and his
team should check whether the added resources of the target
company carry any sense to the acquirer Should the
acquisition be made to broaden the product line to reach
a critical market Is it to address a new customer point
Could the brand value of the target be a wealth creator in
the hands of the acquirer
These need to be hammered out to find a logical answer.
Specific issues to be examined like what would be increased
capacity of the acquirer and what would the comparison
look like if compared with its rivals
What was or is the niche market of the target company
and how did the target make value out of its overall business
and is it still possible to create further value What are the
operational hurdles of the target and how the acquirer is
going to address such hurdles How the scale of economy
shall show advantageous to the acquirer Lastly, what would
be the incremental cost (interest for borrowing for M&A)
vis-à-vis the incremental volume and the incremental return
on capital
Some Related Issues:
The recent M&A deals by Indian business groups abroad
and by non-resident Indians in Europe and US, is perhaps
a positive response to “satisfactory underperformance” as
told by late Sumantra Ghosal. These issues are currently
being deliberated upon at the management schools. While
making analysis relating to M&A strategies some time, it
is not uncommon that the companies forget that may be
a joint venture or a strategic alliance is more flexible than
an acquisition proposal. M&A is an answer for long-term
need or when operations are to be integrated perfectly at
many levels. The question of affordability should also be addressed.
In the absence of cash available, private placement,
leveraged buyout could be the source of fund. Funding by
diluting stake of promoter is also not un-common beside
reverse merger. The deal maker and the management of the
acquirer should settle these issues upfront, because the funding
model always creates an impact on the future financial
performance of the target and the acquirer. At the legal front
collateral agreements are important between the acquirer
and the investment banker, consultants, lawyers, auditors
in order to avoid confusion and unnecessary disclosure
of confidential matters. The management of the acquirer
should develop its team for due diligence and post-merger
integration, to avoid any conflict in the process.
In the absence of cash available,
private placement, leveraged buyout
could be the source of fund
Some Observations:
There are unfortunate instances of due diligence which
echoed the desire of the acquirer in the report and obviously
the M&A failed to be a tool for growth of the combining
entity. Due diligence have the following as source
of information:
1. Public information, public document etc.
2. Research based on feed-back from the customers, suppliers,
distributors, alliance partners, former employees,
competitors, business journalists, analysts and industry
experts.
3. The target company, through its management accounts,
interviews with management team.
4. And lastly, own understanding of the acquirer from database
on customer satisfaction and employee turnover
rates etc, and its causes. Theoretically the due diligence
team should meet regularly during the due diligence period
to exchange their views and findings and the leader
of the team should have courage not to echo the thought
of the owner of the acquirer and should carry sufficient
amount of courage to arrive at a logical and bankable
findings of due diligence report. The due diligence team
should have ability to adjust objectives and the scope of
July-October - 2007 Need the Dough
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